Manufacture or service: Must we choose?

This debate is futile in India's development journey

The structural transformation followed by most developed countries, and those that developed later like Korea and China, and now Vietnam, was to first industrialise and then develop services, shifting millions out of agriculture. In India's case, this structural transformation became lop-sided. India suffered what Dani Rodrik called "premature de-industrialisation", with the share of industry peaking in 2008 at around 32 per cent of gross domestic product and then falling to around 25 per cent of GDP. In contrast, India did remarkably well early on in services, especially IT-related, and now also in health care and e-services. This has led some to argue that India should pioneer a new service-led growth model and should not waste its energy and resources on industrialisation.

But we need both. India is a large, highly diversified country with a massive pool of employable individuals at various levels of education and skills. While a small set, with engineering degrees benefit hugely from the rapid growth in high-end services and is in short supply, a large mass of people with basic school education needs low-skill manufacturing jobs. The lack of such jobs has meant that an increasing number of people are either stuck on the farms where employment has in fact increased by almost 60 million in the last five years or form the large mass of unemployed youth in urban and peri-urban areas. It also explains why female labour force participation remains low. With 8-10 million people entering the workforce every year and a large stock of unemployment, the service sector alone, despite all its success, will not be able to employ so many people - especially from rural areas with only a school-level education.